What Does it Mean When the Dollar Is Weak or Strong?

What's the effect on U.S. jobs?

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What does it mean to have a strong dollar versus a weak dollar? If this debate confuses you, you're not alone, as it is a very complicated question that mixes the stock market, politics, global gamesmanship and economics. In other words, there are no easy answers.

With this brief review, get a better understanding of the weak versus strong discussion and the terms involved. Note that it is somewhat easier to grasp the top-level aspects of the debate.

This can be particularly helpful to investors in the stock market.

Understanding the Strong Dollar

Most of the world's major currencies float in value relative to one another. The U.S. dollar is often the standard by which other currencies are measured. A strong dollar means that our currency buys more of a foreign county's goods. This can be good for consumers and international travelers because things they want to buy (think electronics) and places they want to go are cheaper.

However, the downside is U.S. companies that sell goods to foreign customers suffer because, relative to a weaker currency, our goods and services cost more. This may mean U.S. producers are at a disadvantage in the global market.

This can lead to manufacturers moving plants to foreign countries with lower costs, so they can remain competitive. In short, a strong dollar can mean jobs lost in the United States.

The Meaning of a Weak Dollar

A weak dollar means our currency buys less of a foreign country's goods or services.

Prices on imported goods rise. Consumers must pay more for imports and foreign travelers may need to scale back a vacation because it is more expensive when the dollar is weak.

However, a weak dollar also means our exports are more competitive in the global market, perhaps saving U.S. jobs in the process.

When a large trading partner (our largest) like China artificially keeps its currency weak, it hurts the balance of payments, meaning its goods are cheaper than domestically produced products. Though a short-term boon for the consumer, a weak currency of a foreign competitor means U.S. manufacturers have trouble competing.

Conflicts over currency can (and have) led to trade wars where import tariffs are imposed in response to artificially weak currency of major trading partners. Trade wars are generally counter productive, but sometimes politicians are more concerned with what plays well with the home crowd rather than what it means for the overall economy.

Wrapping Up

As with most things, a balance between a strong dollar and a weak dollar is the best for our economy and stock investors. Consumers pay reasonable prices for imported goods and our manufacturers can compete in the global marketplace.

This information is not meant to be (and should not be) construed as advice or used for investment purposes. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.